Investor Intelligence March 10, 2018

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Investor Intelligence
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A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)                                                      March 10, 2018

myrnaIA                                                                                                                                                                  Myrna Rivera, CIMA®

From the Executive Desk                                                                         Founder & Chief Executive Officer

Characterized by the return to volatility, February was the worst month in two years for U.S. equities. The strongest start to a year for U.S. stocks since 1987 (through January 26) was followed by one of the worst five-day stretches on record (February 2-8), as both the Dow Jones Industrial Average (DJIA) and S&P 500 fell into correction territory on February 8. Then, the S&P 500 experienced its best five-day rally since 2011 (February 9-15). Stocks saw daily swings throughout the month, with the S&P 500 notching 12 sessions in which it shifted at least 1% in either direction, compared to eight such moves in all of 2017. Further, the CBOE Volatility Index (VIX) rose nearly 50% in February, including its largest ever one-day increase on February 5. Though the majority of losses occurred during the first week of the month, investors remained on edge throughout February amid renewed concerns over rising inflation and speculation about the Federal Reserve’s plans to accelerate the pace of monetary policy tightening. Globally, the MSCI All Country World Index experienced its first monthly decline since before the U.S. election in November 2016, with markets in China, Japan and a host of others also entering into correction territory. The activity in U.S. equity markets reminded investors in February that volatility does still exist. The modest weakness in the final week of January turned into a rout over the first few trading days of February, as investors were spooked by data showing the first signs of inflation, including continuing upward wage pressure. This data sent all of the major indices down 7.5%-9.0% by February 8. However, ongoing positive earnings reports, including the significant projected impact of the tax reform bill passed in December, allowed the market to recover a little more than half of those losses over the remainder of the month. Energy was one of the worst performing sectors, as rising U.S. inventories caused oil prices to fall nearly 8.0%. The more defensive segments of the market were also hit hard, particularly the dividend payers and other bond proxies, as interest rates rose sharply during the first three weeks of February. The Information Technology sector had the only positive return for the month, very modest in the large cap space and essentially flat in small caps.

Edmundo J. GarzaEdmundoIA

Economic Perspectives                                                                                                               President

To many investment analysts it’s time to acknowledge that the technology sector is rapidly evolving and blending what we have traditionally separated; the internet, media services and telecom companies. “The internet began as a technological approach to sharing information; it has become the way many businesses operate,” said David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices in a recent press release. S&P Dow Jones Indices is a leading provider of financial market indices, and as a result of their annual review of the Global Industry Classification Standard (GICS®) structure, the Telecommunication Services Sector is being broadened and renamed as Communication Services to include companies that facilitate communication and offer related content and information through various media. The renamed Sector will also include telecommunication companies, as well as companies selected from the Consumer Discretionary Sector currently classified under the Media Industry Group and the Internet & Direct Marketing Retail Sub-Industry, along with select companies currently classified in the Information Technology Sector. The changes, which go into effect in September 2018, will reorganize several high-profile technology stocks and realign sector definitions. As much as $62 billion in passive assets could be impacted by the change. The new sector will split into two industry groups: telecommunication services, and media and entertainment. The telecommunications services group will continue to provide exposure to providers of telecom and related services, but now it will also include internet service providers. The media and entertainment industry group, meanwhile, will break up into three new industry sub-groups: media, entertainment, and interactive media and services. The media industry group will contain advertising, broadcasting, cable and satellite, and publishing companies, while the entertainment industry group will focus on entertainment products and services providers, as well as online entertainment streaming companies. Interactive home entertainment content, such as games or mobile gaming apps, will fall into the entertainment group as well. Bottom-line, technology companies are expected to continue gain greater ground in investor’s stock portfolios.

 Indicators (As of March 10, 2018)

United States:

CPI: 2.3% Chg. from yr. ago

Unemployment Rate: 4.1%

GDP: 2.5% Comp. Annual rate of Chg. on 2017:Q4

Ind.Prod.Index: -0.1% change from previous month

Source: St. Louis Fed. Res. 

Japan:

CPI: 0.9% Chg. from yr. ago

Unemployment Rate: 2.4%

GDP: 0.4%, Comp. Annual rate of Chg. on 2017:Q4

Ind.Prod.Index: -6.6% change from previous month

Source: Moody’s Analytics 

Eurozone:

CPI: 1.3% Chg. from yr. ago

Unemployment Rate: 8.6%

GDP: 0.6%, Comp. Annual rate of Chg. on 2017:Q4

Ind.Prod.Index: -0.1% change from previous month

Source: Moody’s Analytics 

Puerto Rico:

CPI: 0.9% Chg. from yr. ago

Unemployment Rate: 9.9%

Payroll Employment: -3.4% Chg. from yr. ago

GDB Econ. Act. Index: -9.4% Chg. from yr. ago

Source: P.R. GDB 

EvangelineIAEvangeline Dávila, CIMA®

Market Update                                                                                         Chief Research & Investment Officer

Stocks:        February was the first month since last March that posted a negative return in all three of the major US Indices: the Dow fell 4.0%; the S&P 500 was down 3.7%; and the NASDAQ dropped by 3.7%. Large caps, as represented by the Russell Top 200 Index, were down 3.5% for the month, marginally outperforming small caps (Russell 2000 Index declined 3.9%) and mid-caps (Russell Midcap Index fell 4.1%).

Bonds:         U.S. fixed income markets largely posted negative returns in February, as interest rates rose sharply. Economic data continued to show modest but consistent wage growth, and January’s CPI numbers surprised to the upside. The U.S. Treasury curve steepened slightly during the month, as the yield on the 2-year Treasury note rose 12 basis points, while yields on both the 10-year note and 30-year bond were up 15 basis points. Short-term indices hovered around the breakeven point, but losses increased the further investors moved out the yield curve. 

Alternatives: Real assets were also down in February. The Bloomberg Commodity Index as a whole was down 1.7% but up 0.7% when the energy component is removed. The FTSE NAREIT Equity REIT Index was down 7.7% for the month%. Hedge fund performance fell in February as global equities declined, ending a streak of fifteen consecutive monthly gains for the broad-based HFRI Fund Weighted Composite Index (FWC).

Eileen RiveraEileenIA

The Advisor’s Corner                                           Due Diligence Officer & Investment Adviser

For many institutional investors, a 5% real return has been their standard investment objective for quite some time. Grant-making private foundations, for example, expect a 5% real return to comply with the Internal Revenue Service’s mandated payout to remain tax-exempt, while retaining long term purchasing power of their assets. Yet since the 1930s, the rolling average of a traditional 60% stock / 40% bond portfolio has achieved a 5% real return only 56% of the time. Moreover, many expectations for future returns for stocks and bonds (including Consultiva’s) are lower than their historical long-term averages. In a recent white paper, Vanguard research examined whether that 5% is still a viable return target, and examined three key levers that institutions can use to maximize the probability of achieving this return. They concluded that while a 5% real return is more than ever an ambitious target, it could be achieved using an integrated approach that considers asset allocation, spending levels, as well as revenue-raising strategies. This strategy along with proactive financial planning, can provide investors with the greatest prospect for success. Investment performance alone should not be relied upon, as forward-looking projections of market conditions do not provide grounds for optimism and historical returns do not point to any specific asset allocation that would enable investors to continually meet the 5% real objective. Adding more risk to a portfolio can, over time, increase returns, but typically with greater volatility. An organization can exert greater control over spending, and in securing multiple revenue streams if possible to achieve their mission.

What to Do?

We entered 2018 with the U.S. stock market at new highs, but indices fell sharply in February. Rising interest rates and volatility are now of greater concern. The U.S. economy continues at a healthy pace and there are signs that the trend will also continue overseas. However, a whole host of geopolitical challenges continue to cause concerns, as does the impact of new U.S. policies on global markets. Much uncertainty remains with respect to the scope, implementation and timing of these policies. Amid an uncertain scenario we continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount. 

DISCLAIMER:

Consultiva is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. Consultiva has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.

 

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